Taylor On US Markets & GoldMARKET FORECAST
"Every year analysts are asked to make predictions for the year ahead. Many
groan in protest that it is a silly exercise, that no one can possibly see the future. Personally, I don't think it is silly at all, provided that you have good tools and that you realize the limitations of those tools. While the market has often thwarted my annual forecasts (and periodic adjustments), I think they have been useful to those who accept them as being a guide, not a firm declaration of fact.
"I use existing trend lines combined with cycle projections to develop my forecasts. The trend lines define possible limitations of price moves, and the cycle projections help me estimate time frames at which price highs and lows may appear. It is an exercise in using what we know in the present, to
forecast a possible future outcome. It is no more unreasonable than using
projected population growth patterns in a decision of whether or not to buy a piece of land. Of course, no one can see the future, but we can ask, "What do we know, and what can we conclude from what we know?" The forecast tells us what to look for. If the market behaves contrary to our forecast, no big deal. We change the forecast -- it is not cast in stone.
"This year I have decided to use the S&P 500 instead of the Dow for our
forecasts because the S&P 500 is a broader index and I believe it is more
representative of what is happening to stocks in general.
"At present, we are in a secular bear market as defined by the long-term
trend shown on the chart above. Valuations are well above historical norms,
and I do not expect them to be favorable for at least another 12 to 18
months. If historical norms prevail, the problem with valuations will not be corrected by significant earnings improvement, but primarily by a price
decline to undervalued levels, currently about 300 on the S&P 500.
"There are two dominant features on the chart above: (1) The long-term
declining trend channel defined by lines
"A" and "B"; and (2) the head and shoulders neckline drawn across the
October 1998 and September 2001 lows. The trend channel shows us the likely range of prices until the channel boundaries are violated, and, because the head and shoulders neck line has been violated, we have a technical
downside target of about 350 for the S&P. Finally, the projected locations
of the 9-Month Cycle troughs give us a tentative target of about 450 by the
end of 2003, and 350 by mid-2004. (Note: The dotted blue lines are just a
rough estimate of the path the market might take.)
"One other element that influences my outlook is my belief that this bear
market is following the model of the 1929-1932 Bear Market (a parabolic
collapse), which means that we're more likely to see a continuation of the
rather brisk, direct movement toward the ultimate bottom, rather than the
meandering years-long sideways consolidation that many are hoping to see.
And I see little chance of a new bull market emerging (which I will define
as a rising trend lasting a year or more) before downside targets are
"It will be possible to find upside trading opportunities during the
relatively short periods (several weeks) in which the market is moving
higher within the declining trend channel. Typically, these opportunities
will present themselves at 20-Week and 9-Month Cycle troughs, but for these forecasts I only use the 9-Month Cycle for simplicity.
"BOTTOM LINE: Important technical and fundamental elements are almost
perfectly aligned to support the conclusion that the market is headed much,
much lower. In fact, based on what we can see at the moment, I can reach no
other conclusion; however, I am capable of changing my mind if the picture
changes. As usual we will periodically update this forecast throughout the
year, probably dining on some crow in the process.
"Carl Swenlin "
Needless to say, Mr. Swenlin's predictions are in tune with Ian Gordon's
Kondratieff winter as espoused in this our weekly and monthly letters.
Regarding deflation and gold, Richard Russell made the following comments
this past week which I wholeheartedly agree with.
"Gold - I want to say a bit more about gold. I've beseeched my subscribers
to take a position in gold and gold shares. Repeat-take a position in gold,
and if you haven't done so, take a position NOW.
"I'm very much afraid that the US is going into a state of deflation. The
bonds are telling me that. The economic statistics are telling me that. My
"insides" are telling me that.
"The U.S. has accumulated too much debt. The US has accumulated more debt than it can handle. The situation looks increasingly as though the debt
mountain is about to fall over. If it does, we will have deflation.
"If we are going into deflation, then investors are going to turn to items and assets that will stand up and remain solvent under severe deflationary conditions - under bankruptcy condition.
"There's a 'safety pyramid.' At the base of the pyramid is gold. Gold is pure intrinsic money, gold is nobody's debt as is the junk we call 'dollars' that are churned out by the Federal Reserve.
"Therefore, knowledgeable investors who want to protect themselves against deflation will 'go for the gold.' Gold under deflationary conditions
represents ultimate safety . This is the basic reason for the move that
we're seeing now as the price of gold rises higher and higher.
"I heard some fool on CNBC today denigrating gold. He said that gold only
goes up in the face of some news emergency such as an attack on Iraq.
"Gold is rising because it senses deflation and debt collapse. Gold is going up because big money, sophisticated money, smart money - is moving to
protect itself against a potential deflationary collapse.
"Note -- Subscribers are writing telling me that some analysts are saying
that gold is topping out and that gold is 'blowing off' and that gold will
shortly cave in.
"They may be right, anything can happen to anything in any market.
"But the Russell view is different - the Russell view is that gold is in a major bull market. Furthermore, gold is in the early or accumulation phase of this bull market. Further still, since this is a bull market in gold, I believe gold will go vastly higher.
"Remember, I go by price action, and I don't care what other analysts say.
I go by what the markets tell me, and what my brain tells me - and they
tell me that gold is in a bull market and that it is heading higher.
"Incidentally, the commercials (gold banks, hedged mines) currently have a hug short position in gold of 143,000 contracts. And they keep adding to
their short position. Ordinarily, the commercials will prevail. But this time the commercial shorts are aligned against the primary trend of gold. The commercials are being squeezed. They need a big break in gold to make money or even to get out of their positions. And so far, they are not getting that big break. How much longer will the commercials continue to build up their short positions? I don't know. But once a position is taken, it has no further ability to weaken the market. Only additional new short positions can weaken the market, since new shorts represent further supply."
January 13, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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